Tuesday, June 11, 2013

Hooked on Economic Happy Pills

Before U.S. markets opened Tuesday, markets across Europe and Asia were already markedly lower. It’s because equity investors hooked on central bank stimulants want more and more to stay high. We received two bits of information Tuesday that reinforce this argument. But as I reviewed the economic data from Japan and Germany, I see the dealers still serving us. It’s just that we seem to want and need more and more, as we are hooked on happy pills.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

The Bank of Japan (BOJ) issued its latest monetary policy Tuesday, and it was full of colorful pills for our addicted markets to swallow. The BOJ’s statement shows all sorts of creative economic engineering efforts in an asset purchase program that makes our Federal Reserve’s efforts look simple.

The BOJ is doing more than buying treasuries, and it has gone beyond the buying of mortgage backed securities (MBS) like our Fed. The BOJ is buying treasuries, yes, but it’s also buying ETFs and Japanese REITs. Imagine if our Fed were buying the shares of mortgage REITs like Annaly Capital (NYSE: NLY) and American Capital Agency (Nasdaq: AGNC). It goes a step beyond the controversial effort our Federal Reserve is applying, and is bringing leverage into central banking. The BOJ is also buying corporate bonds, tying the economy into one big knot that it may not be able to untie quickly enough someday.

Yet, equities across the globe were bothered Tuesday, because of concern about not enough being done. Investors wanted to see the BOJ buying longer dated securities. In other words, junkie investors want a higher high, because they think this one is not enough. I would have to disagree. These are extraordinary measures that show desperation and introduce risk to at least the Japanese, and probably the rest of us if they are accepted into the toolbox of central banks globally. It’s like our Fed efforts in MBS were a stepping stone drug into the much more dangerous cocaine and methamphetamines being used in Japan. What will come next, the economic equivalent of dangerous new “bathing salts”? I am unsettled inside about it all. We are getting hooked on economic happy pills, and it is unnatural and dangerous.

Meanwhile, the global junkie is worried today that German logic could kill the party. The German Constitutional Court is reviewing whether recent European Central Bank and other euro area crisis management measures are legal in Germany. One of those measures is ECB bond purchases, which was critical in turning the tide for stocks in Europe. So, investors see this German debate as a threat to their supply. Druggies do not fret, though, because the Germans cannot afford to cut you off.

Look at how this economic mayhem has affected markets today:

Market Security

Through 10:00 AM ET

SPDR Dow Jones (NYSE: DIA)

-1.0%

SPDR S&P 500 (NYSE: SPY)

-1.0%

PowerShares QQQ (Nasdaq: QQQ)

-1.1%

iShares S&P Europe (NYSE: IEV)

-1.2%

iShares S&P Asia 50 (NYSE: AIA)

-1.5%

Friends, we are hooked on economic happy pills. Instead of seeking higher highs, we need to find natural ways to make us happy, through fiscal policies that reinforce economies. Improved trade & tax laws and the better containment of runaway funds are a start. We may yet get there, but we are currently caught in the middle of an economic drug war, and we have to get some help to cure this addiction.

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